- We reaffirm our BUY recommendation on Eastern and Oriental (E&O) with an unchanged fair value of RM3.00/share, including the significant accretion to its asset value from Seri Tanjung Pinang 2 (STP2). Stripping off STP2, our NAV stands at RM1.36/share.

- As a recap, the Penang state government had awarded the RM6.3bil Penang undersea tunnel project to consortium Zenith BUCG. As a payment in kind, the consortium will be given a 30-year toll concession and 110 acres of reclaimed land at STP2 by the state government – 60 acres in STP2 and 50 acres along the shoreline towards Gurney Drive.

- It was reported in local dailies that the consortium has been granted nine acres of land at STP1 by the Penang State Government, which is worth RM305mil (RM893psf).

- This RM305mil is to finance the cost of the initial feasible studies and detailed design (FSDD) works of the undersea tunnel project. Bulk of it will be spent on:- (1) detailed design work – RM180mil (60%); (2) feasibility studies – RM91.5mil (30%); and (3) detailed environment impact assessment – RM30.5mil (10%).

- The nine acres at STP1 will be carved out into two parcels by the consortium – 3.73 acres (Parcel 1) and 5.7 acres (Parcel 2).

- Parcel 1 is a joint mixed development between the consortium and Ewein Land (40:60 JV). The consortium has yet to select a developer for Parcel 2 although it has already received a few proposals.

- After the deduction of nine acres at STP1, the consortium will be given 100 acres (originally 110 acres) at STP2 by the state government. This will be used to fund the construction of major roads and tunnels on Penang Island and part of the undersea tunnel.

- It is also reported that the 100 acres at STP2 will not be awarded to an individual developer. Instead, a pool of developers will contribute to fund the entire 100 acres development by collectively overseeing it.

- Despite the changes in the land swap between the Penang state government and the consortium, E&O will still surrender 191 acres to the state government as part of the reclamation of STP2 – 60 acres in STP2 and 131 acres along Gurney Drive.

- All in all, no change to our earnings estimates. Approval on the DEIA study for STP2 is expected to be granted in 2Q.

Source: AmeSecurities